When does it make sense to hold a position overnight? There may be a simple guide.
Since 2004 (N = 722 trading days), when we close in the top half of the day's range (N = 411), the average subsequent overnight change in the S&P 500 Index (close to open; SPY) is -.02% (181 up, 230 down). When we close in the bottom half of the day's range (N = 311), the overnight change has averaged a gain of .11% (205 up, 106 down).
What this suggests is that the overnight action tends to reverse the late movement during the previous day. Essentially all of the day-to-day upward drift in the S&P 500 Index since 2004 has consisted of this overnight reversal effect.
Here's another interesting, related pattern: When we close in the top half of the day's range, the next day takes out the previous day's high 280 times and fails to breach the high only 131 times. We take out the previous day's low only 142 times, and fail to take out the low 269 times.
When we close in the bottom half of the day's range, the next day takes out the previous day's high only 105 times and fails to break the high 206 times. But we break the prior day's low 185 times and fail to make a low 126 times.
Bottom line? Where we close in the previous day's range seems to affect the next day's overnight and intraday trajectory. Combining this tendency with intraday setups can lead to very fruitful trade ideas.